Taxes When You Retire Abroad

Moving abroad does not mean leaving your taxes behind. For United States citizens, tax duties follow you around the world, and your new country may want tax from you too. This post explains the basics of how that works, so you know what to ask a tax professional about before you move. It is general education, not tax advice, and the details depend on your own situation.

The key fact: US citizens are taxed on worldwide income

The United States taxes its citizens on their income no matter where they live. If you are a US citizen living abroad, you generally still have to file a US tax return each year and report income from everywhere, including work, investments, pensions, and rental income. Living abroad does not end that duty.

The foreign earned income exclusion

The foreign earned income exclusion lets you exclude some of your foreign earned income from US tax. It applies to earned income only, such as wages and self-employment income. It does not apply to pensions, Social Security, dividends, interest, or capital gains. For 2025, the limit is $130,000. For 2026, it is $133,000. The limit rises with inflation each year, so check the current figure when you file.

To use the exclusion, you must meet one of two tests. The bona fide residence test asks whether you were a resident of a foreign country for a full tax year. The physical presence test asks whether you were in a foreign country for 330 full days in a 12-month period. You claim the exclusion on Form 2555 with your tax return.

The foreign tax credit

The foreign tax credit is a different tool. It gives you a credit against your US tax for income tax you paid to a foreign country. It can apply to income the exclusion does not cover, such as dividends and pensions. The credit is limited. It cannot be more than the US tax on that same income. You claim it on Form 1116.

You cannot use both tools on the same income. If you exclude income with the foreign earned income exclusion, you cannot claim a foreign tax credit for the tax you paid on that excluded income. That rule is the heart of the choice between the two.

Exclusion or credit: how to choose

The right choice depends on your income and on the tax rate where you live. The exclusion is often better when the foreign tax rate is low, because there is little foreign tax to credit. The credit is often better when the foreign tax rate is high, because the credit can wipe out the US tax on that income. The credit is also the only one of the two that helps with income that is not earned income, such as dividends and rental income. Run both options before you file, with a tax adviser who knows expat tax, and keep the records that support your choice.

Worked example: the exclusion and the credit

Take a hypothetical retiree who still works part time abroad. All numbers are round and made up. They show the math, not a real person. Assume the person meets the physical presence test and files for tax year 2025, when the exclusion limit is $130,000.

Step 1: The person earns $100,000 in foreign wages.

Step 2: The exclusion limit for 2025 is $130,000. The $100,000 of wages is below the limit, so the full $100,000 can be excluded.

Step 3: US taxable earned income becomes $0 ($100,000 minus $100,000).

Step 4: The exclusion covers earned income only. Say the same person also has $20,000 in US dividends. That $20,000 is not excluded. It stays taxable in the US.

Step 5: No foreign tax credit is allowed on the excluded $100,000. If the person paid $10,000 in foreign tax on those wages, that $10,000 earns no US credit. Foreign tax paid on the $20,000 of dividends may earn a credit instead.

Step 6: If the person earned $150,000 abroad instead, $130,000 would be excluded and $20,000 would stay taxable ($150,000 minus $130,000). Foreign tax on that $20,000 may earn a credit. The exclusion has a ceiling. Income above it stays in the US tax net.

Tax treaties

The United States has tax treaties with many countries. A treaty can change how pensions, Social Security, and other income are taxed, and can stop the same income from being taxed twice. The rules vary by country and by type of income. Check the treaty for the country where you plan to live.

The state tax trap

Moving abroad does not always end your state tax bill. Some states keep taxing former residents who have not clearly cut their ties. California is the classic example. The California Franchise Tax Board treats you as a resident if you are domiciled in California but outside the state for a temporary or transitory purpose, and California residents pay tax on all income no matter where it comes from. Leaving the state is not enough on its own. You need to show a clear break: a new home, a new driver license, voter registration in the new place, and no home or business left behind in California. Check the rules of your own state before you move, and keep records of the move.

Reporting foreign accounts

If you have bank accounts abroad, you may have to report them. The FBAR rule asks you to file FinCEN Form 114 if the total of your foreign accounts was more than $10,000 at any point in the year. There is a second form, IRS Form 8938, for foreign financial assets. Its thresholds are higher and depend on your filing status and on where you live. The penalties for missing these forms are large, so check the rules each year and file on time.

Other points to know

Social Security benefits are usually taxable in the United States, and may be taxable in your new country too, based on the treaty. If you still have a house, rental income, or a business in the United States, that income is still taxable in the United States. Some retirees give up US citizenship to end the tax duty. That is a major step, it can trigger an exit tax, and it cannot be undone. Do not take it lightly.

How to get help

Talk to a tax professional who knows expat tax before you move, and again before you file your first return abroad. Bring a list of all your income sources, accounts, and assets. The cost of good advice is small next to the cost of a missed form or a double tax bill.

Plan ahead. The tax rules for expats are detailed, and they change. What worked for one person may not work for you. The rules depend on your income, your country, and your state of residence.

This post is for education only. It is not personal financial advice. Talk with a qualified tax adviser before you make decisions about your own taxes.

Sources

• Internal Revenue Service, “Foreign Earned Income Exclusion,” on worldwide income, the exclusion, and the residence and presence tests: irs.gov
• Internal Revenue Service, Revenue Procedure 2024-40, for the 2025 exclusion limit of $130,000: irs.gov
• Internal Revenue Service, “Foreign Tax Credit,” on the credit, its limits, and the rule against credit for excluded income: irs.gov
• Internal Revenue Service, “Report of Foreign Bank and Financial Accounts (FBAR),” on the $10,000 reporting threshold: irs.gov
• California Franchise Tax Board, “Residents,” on when California still treats you as a resident: ftb.ca.gov